The government claims repealing unfair dismissal laws for small and medium business will boost employment figures. According to Workplace Relations Minister Kevin Andrews, unfair dismissal laws had ‘acted as a brake on job creation’ and ‘fostered a culture of complaints and litigation where firms would go to any length to avoid hiring extra staff’ (Australian, 3 November). Any policy that removes these costs should therefore be considered employment-friendly.

The government rests its case - and its notorious claim that 53,000 jobs (later, 77,000 jobs) will be created by lifting unfair dismissal laws - on the results of various opinion surveys in which business owners are asked whether they would hire staff if the laws were rescinded. Given that employers have an interest in the question asked, it is hardly surprising that many answered they would. Economists prefer to judge according to what economic agents actually do (the ‘revealed preference’ approach) rather than what they pretend they will do (and may never do).

Surveying the ‘revealed preference’ literature on this issue yields no compelling evidence that the existing laws have had a negative impact on employment. In theory, firing costs (such as those generated by unfair dismissal protection) have two effects on employment: they deter hiring (the government’s claim) but they also deter firing (especially when the case against the employee is weak). Removing employment protection thus leads to offsetting effects. Which of the two effects prevails is unclear as no robust research has been conducted in this field in Australia. The wider empirical and international literature is also inconclusive. The two most recent literature surveys on this issue make contradicting claims on the relevance of employment protection in the employment debate. If there is any consensus it is that the net impact on employment must depend on time and country-specific parameters such as the number of voluntary separations, economic uncertainty, discounting, the probability of facing these costs, and the relative magnitudes of hiring and firing costs.

It should also be stressed that international organisations and academic research consistently rank Australia as a country with low firing costs. Unfair dismissal laws do not apply to temporary and casual workers - or, in most states, to staff earning more than in the range $75,000 to $90,000. Unfair dismissal compensation is capped at six months’ wages, a third of the cap in many ‘eurosclerotic’ countries. State and federal IR court decisions are not on average friendlier towards employees than to employers (as opposed to those in many continental European countries). Intuitively, removing firing costs in a country in which those costs are already low appears unlikely to yield considerable results.

In a recent study funded by the Australian Research Council, the magnitude of the costs of firing in Australia was estimated with direct quantitative methods and used to calibrate the ‘hiring deterrent’ effect of unfair dismissal laws. Other observed parameters such as the probability of incurring these costs, the average tenure at time of dismissal and long-term labor demand elasticity were obtained from the Industrial Relations Commission, the Australian Bureau of Statistics and the Treasury respectively. The employment impact was found to be relatively mild: at best 6000 jobs would be created by removing the laws. But this ignores the ‘labor retention’ effect, which would also be removed by the policy, adversely affecting employment. Hence, removing unfair dismissal protection may have no impact whatsoever on employment or could even have a negative impact if it triggers a wave of long withheld fires.

There are other much more convincing arguments for removing unfair dismissal laws than their uncertain and probably weak effect on job creation. One is that these laws currently discriminate between employees that are protected by these laws (permanent employees) and those that aren’t. A policy aiming at removing the laws for everyone (or alternatively extending the laws to cover every employee) can only be fairer than the status quo.

From an economic perspective, another argument is that dismissals for reason specific to the worker are either fair or unlawful but never unfair. One way or the other, drinking at work, absenteeism, refusing to work, rebellious behaviour and poor performance always come down to a problem of mismatch between wage and productivity. Perhaps such behaviour also decreases the productivity of other staff or imposes an external cost on the employer. The economic case is clear: dismissal for such reasons is always fair because it is efficient. The possible harshness of the decision and the social reasons behind the employee’s behaviour constitute a grey zone that does not fit anywhere in economic reasoning.

On the other hand it should be clear that employers dismissing fully productive staff for individual reasons (resisting employer bullying on out-of-contract or illegal work, pregnancy, personal dislike, age or race, etc) have a poor case for fair dismissal. Unlawful termination laws that protect staff against such contingencies are not targeted by the government’s IR reforms. A dismissed but productive employee can then contest the dismissal on these grounds even if the employer claims to have acted fairly and lawfully.

If the economic case for removing unfair dismissal laws is so straightforward, then why is the current debate focused on so weak, inconclusive and poorly documented an argument as to whether the costs reduce employment? Perhaps job creation rhetoric derives from political economy considerations and in particular the popularity of the measures, but this skirts the important question: what is the rationale for having (or not having) unfair dismissal protection? A proper debate on this question matters more than obscure and blunt job creation arguments.